Tag: Mining pool

As Bitcoin moves ever closer to its block reward reduction, analysts are becoming more and more convinced that BTC will rally into the quadrennial …

As Bitcoin moves ever closer to its block reward reduction, analysts are becoming more and more convinced that BTC will rally into the quadrennial event. One analyst notes that as this market nears the auspicious shift in issuance, the cryptocurrency could double by value, especially considering historical trends.

Bitcoin Could Reach $8,000 By Halving

PlanB, as the respected analyst is known, claims that at long last, the one-month Relative Strength Index (RSI) measure has begun to trend higher. He adds that historically, in months when Bitcoin’s issuance schedule moves, RSI reaches 70, which implies the asset is overbought.

Thus, extrapolating potential price action by taking historical trends into account, PlanB noted that by May 2020, BTC could reach a hefty valuation of $8,000 to $10,000 — double and 2.5 times Bitcoin’s current market value respectively. The following is his RSI extrapolation model:

“I derive RSI (basically a moving average) from projected price, and goal seeked BTC to get RSI 70 in May 2020 (I think it was +6% every month next 14 months from current price of $3900).”

PlanB isn’t the first to have claimed that BTC may break $8,000 at the time of the halving. Prominent analyst Filb Filb noted that for the continued stability of the mining ecosystem, specifically in regards to the dichotomy between transaction fees and block rewards, Bitcoin should reach $7,000 a piece, considering margins in this subindustry stay stable.

BTC Unlikely To Fall Under $2,000

PlanB’s most recent comments in regards to the Bitcoin price comes after he overtly proclaimed that the asset is unlikely to fall under $2,000, citing historical trends and fundamentals factors. Per previous reports from NewsBTC, the prominent researcher noted that the fact that Bitcoin miners have already capitulated, indicated by the fleeting 25% collapse in network difficulty during November’s strong downturn, should signal some semblance of a bottom.

Historical trends would confirm this. The last two times a large group of miners surrendered to bears, BTC began moving higher in the months that followed, as hashrate eventually returned in full force.

The analyst also drew attention to the impending block reward reduction — dubbed a “halving” or “halvening” — to explain that BTC falling lower wouldn’t be cohesive with historical trends, as the cryptocurrency rallied into previous issuance shifts. PlanB added that Bitcoin has never fallen below its geometric mean, situated at $2,750 at current, and may never will as long as current price levels are upheld. By the same token, he noted that Bitcoin has never fallen below 50% of its stock-to-flow (issuance to supply in existence ratio) model, which currently places BTC at a fair value of $5,500.

While PlanB is making a solid argument for BTC to return to higher levels, some are fearful that the cryptocurrency won’t. Will the bulls or bears come out on top this time?

Dogecoin is a decentralized peer-to-peer digital currency that enables users to send money online. Doge mining is one of the ways to obtain these …

Dogecoin is a decentralized peer-to-peer digital currency that enables users to send money online. Doge mining is one of the ways to obtain these coins but before we dive into how Doge mining works, let’s take a quick look at what Dogecoin is.

“Doge” is the fun, friendly mascot, the Shiba Inu a Japanese breedof dog now it’s the ‘face’ of a virtual currency that was popularized as anonline meme and represents Dogecoin.

As of writing time, it is one of the top cryptocurrencies in terms of market capitalization and can still be mined.

This Doge mining guide will dive more on how to obtain the coins, which equipment is required and a few tips to take along before deciding to engage in Doge mining.

Dogecoin Historical Background

A Dogecoin is a form of cryptocurrency created by two gents; Billy Markus and Jackson Palmer. Unlike other coins, the Dogecoin was not started as a serious coin but rather as a parody of the existing coins in the crypto market for purposes of creating fun after they noticed people were taking cryptocurrencies too serious.

In the year 2013, the Dogecoin was first released into the market. The main goal of the coin was to make the cryptocurrency world more approachable.

Eventually, they did what no one expected. Thdy used the famous Shiba Inu dog from a meme for their currency.

It was initially used to make donations to charity organizations and financing of sporting activities. With improvements in the technology; Doge coin can now be used by merchants for regular transactions.

The technology behind Dogecoin

Dogecoin uses a similar technology just like Bitcoin. It runs on the blockchain platform but with some few distinct features. The blockchain acts as distributed forms of ledgers executing transactions in a safe, fast and secure manner.

Information on blockchain ledgers can be accessed by anyone making it a trustworthy and effective system. This gives users the liberty to confirm if the information on the ledger is legit or not and that’s the main thing that builds trust in Dogecoin users.

Note that personal data for Dogecoin users is kept private which enhances privacy.

Uses of Dogecoin

Just like most cryptocurrencies, Dogecoin has the ability to be used as digital money and can be accessed from the holder’s wallet on Smartphones, websites or computers.

However, it is widely used for online charity and tipping content creators on online platforms that accept the coin.

The coin also offers the possibility to mine them which can later be sold on exchanges or exchanged for Bitcoins or any other cryptocurrency of your choice. Mining Dogecoin is not a complicated process as we shall see below.

What Is Doge Mining

Doge mining is a method through which doge miners get rewarded DOGE coins for verifying transactions made on the Dogecoin Blockchain technology.

Look at Doge mining similar to the way people mine gold. The only difference is with Doge mining, rather than investing in heavy machinery to dig through the ground, you are investing computer hardware equipment with which to solve complicated mathematical prolems

Once a block is being hashed, participants on the network get rewarded with Dogecoins for using their electricity and equipment.

How to mine DOGE

There are 3 ways to start mining DOGE coins. This could either be via solo mining, pool mining or cloud mining. Depending on your Doge mining goals, one of these options could suit you.

Solo Doge mining:

As soon as you have the required software and hardware in place, you can start with solo Doge mining.

You may have heard that solo mining of Dogecoins does not currently exist but that is not entirely true. The bloating of the hash rate by the litecoin miners is what has caused a decline in the solo mining of Dogecoins.

With this approach, you will be required to provide the required hashing power on your own and you get to be the only one benefiting upon confirmation of blocks.

ote that solo mining may not yield any reasonable profits if you are practicing it on a small scale. You can only enjoy maximum profits from solo mining if it is on a large scale and with heavy equipment.

In fact, solo Doge mining isn’t efficient as it used to be given the fact that the mathematical problems are becoming harder and harder to solve, so the chances that someone else gets the reward and you stay with nothing are pretty high.

Typically, solo miners are either beginners or geeks who’re engaged in the process itself. For this reason, people usually resolve to the second method– collective mining.

As a result, you will only earn Dogecoins by merge mining it with the litecoin.

Pool Doge mining:

With the doge mining pool, miners unite forces with each other and contributes their hashing power makeing it easy to earn more Dogecoins. All computers on the network work together to solve mathematical problems, which boosts efficiency considerably.

It is advisable to go for this option if you are still new in doge mining and you wish to get higher returns on whatever you invest. Once a block is confirmed, it is then shared proportionally to all members of the contributing pool fairly.

Also, joining a mining pool will protect you from the stiff competition involved in this process. Pooling your mining operations gives you the capacity to compete for the existing blocks with large mining operators.

Ensure that the pool you join supports scrypt mining.

Given the vast variety of doge mining pools out there, choosing a well-established pool with a good reputation and minimal fees is something potential doge miners should take into consideration.

Cloud Doge mining:

For those not able to invest heavily in Doge mining equipment, you can also mine the Dogecoins from the cloud. This is an easier method of doge mining as it does not require you to own the hardware and software.

With cloud mining, you can just lease the capacity from a third-party provider who has already invested heavily in the hardware required in data centers. This way, work is done by the equipment of the owners.

As a tip for cloud mining, make sure to always read customer reviews, as well as rental terms offers. Also, it’s better to engage in Doge mining for a longer period of between 6 to 24 months.

Also, large websites usually offer a discount for clients ordering their power for a greater term. Also, try to get options that provide instant withdrawal.

Cloud Mining is perfect for people who are committed to other activities but want to obtain and trade Dogecoins.

Just like with any other coin in the crypto world, there are risks associated with cloud mining of the Dogecoin. One of the risks is that the contracts signed in cloud mining are time-bound and often up front. This implies if your contract only lasts for one year and Dogecoin prices for that specific year fall below the costs incurred in mining the coins, you will automatically incur great losses.

It is also important to note that Doge cloud mining has experienced a lot of challenges in the recent past. Most companies that used to offer the scrypt mining contracts now barely offer such contracts making it difficult for amateur miners to get into the mining market.

The golden tip is beware of SCAMS. This is one of the mining methods with large scale scams. Always make sure you do in depth research before participating in cloud mining.

Doge mininghardware and software

Just like any other activity, you requiresome tools/equipment to begin the mining of Dogecoins. Below is a list of thethings that you will require.

Hardware;

You can begin Doge mining with any operating system be it Windows, Mac OS or the Linux open-source operating system. However, these operating systems are only good for trying out bitcoin mining. You will require more complex OS such as the GPUs and ASICs for more serious mining.

In addition, you will require; a PC, a steady internet connection and a doge wallet. Some good equipment you could look into are; ASUS RX Vega 64, SAPPHIRE Pulse Radeon RX 580 and Nvidia GeForce GTX.

Software;

oftware used for Doge mining varies from each other depending on the running operating system. Dogecoin wallet; this wallet is quite essential for storing the mined bitcoins. You should ensure that you’ve chosen a secure wallet for added safety of your coins

Pros of owning Dogecoins

They are fast and fun to use

Transaction speed is faster in comparison to other coins

The rates charged on the platform are relatively low

It has benefited a number of charitable organizations.

Consassociated with the Dogecoins

Generally, it is not so profitable to mine the coins

The Dogecoin has constantly kept losing in the cryptocurrency market since the update of the blockchain.

Closing remarks on Doge mining

The choice of which method to use for Doge mining depends on the individual, his resources and the reason for mining. It’s up to you to choose which method of mining suits you best,

Nevertheless, do not invest more than what you’re ready to lose when it comes to cryptocurrencies because mining could also lead to loses.

However, it could be profitable down the line making your time, investment and work pay off as many have made significant returns from mining especially looking back at the early days of Bitcoin.

Alistair Milne, the chief investment officer at Atlanta Digital Currency Fund, has said that the block reward halving of Bitcoin could push the price of the dominant cryptocurrency to massive gains in the next 12 months.

Why Block Reward Halving is a Fundamental Driver of Bitcoin Price

The Bitcoin price should receive a major boost from the halving next year. | Source: Yahoo Finance

A block reward halving in Bitcoin is referred to as the mechanism that decreases the amount of Bitcoin generated by miners after mining a block.

On the Bitcoin network, miners solve complex cryptographic problems using computing power to process transactions, which are then placed in blocks to form a blockchain.

To compensate miners, every block generates a certain amount of Bitcoin which miners then can use to cover their expenses such as equipment and electricity costs.

The block reward of the Bitcoin network is expected to decrease by half in 15 months, and traditionally, a block reward halving has led the price of Bitcoin to rally because it reduces the rate in which new BTC is produced.

The next Bitcoin block reward halving will take place around May 2020. | Source: Bitcoinblockhalf.com

As Bitcoin nears its fixed 21 million supply, the scarcity of the digital asset increases, which boosts the price and the demand from the market.

Milne said:

“Just 15 months or 450 days until the next Bitcoin halving event…. can’t wait for everyone to say its already priced in for the next 12 months. It isn’t.”

According to Barry Silbert, the CEO of Digital Currency Group – arguably the largest venture capital company in the cryptocurrency sector – many retail investors are not aware of the block reward halving and the impact it could have on the Bitcoin price.

“I’d guess that upwards of half the people I know that invested in bitcoin have never heard of “halving” or know what it is. and those are the people that already own bitcoin. That guess is based on me asking folks over the past month,” Silbert noted.

Historically, the Bitcoin price has tended to move a year before the block reward halving. While some analysts claim that the halving is mostly priced in, the numbers show that it gets priced in gradually as the cryptocurrency nears its halving date.

“People calling for $1,000 Bitcoin don’t realize the halving pump traditionally starts a year ahead of time. The next halving is May 2020, meaning we are only a few months away from the start of the pump Are we really going to dump another -70% in the next few months? Doubt it.”

In the past, when the block reward halving of Bitcoin occurred, the circulating supply of the asset was still estimated to be close to its maximum circulating supply.

However, in recent years, due to private key losses, dormant addresses, and exchange mismanagement, millions of BTC have reportedly been lost permanently on the blockchain.

Lost coins make up a significant percentage of the total BTC supply. | Source: Chainalysis.com

Once lost, it is virtually impossible to recover lost Bitcoin without initiating a hard fork, which the community has never considered initiating throughout the past ten years.

Lost Coins Further Reduce Supply & Bolster Demand

Chainalysis, a blockchain analytics company, estimated in 2017 that 4 million BTC are lost forever and are out of circulation.

At the time, Chainalysis senior economist Kim Grauer said that industry experts found the figure surprising.

“Firstly, we floated our findings to a few people and they all had different reactions about how surprising the figure was. But what I found most surprising/interesting was how when you unpack what it means to be “lost” things get even more confusing.” the researcher said.

Since then, more BTC is estimated to have been lost, and the block reward halving will only decrease the available supply of the asset.

As such, Bitcoin is actually a deflationary currency, and as the block reward of the asset declines over time, it will decrease the possible amount of crypto investors can purchase – and push up the price of BTC.

What is the economic potential of this new means of exchange? In this column, I analyse the underlying economics of how Bitcoin achieves payment …

That Bitcoin doesn’t seem to have a use – other than educating us in the scams possible in a money system – is one of those things gradually dawning on people. That it’s not going to get any better is explained by the doomsday loop of proof of work. That being explained here:

The doomsday economics of ‘proof-of-work’ in cryptocurrencies

Raphael Auer 08 March 2019

Bitcoin and related cryptocurrencies are exchanged via simple technical protocols for communication between participants, as well as a publicly shared ledger of transactions known as a blockchain. This column discusses research on how cryptocurrencies verify that payments are final, that is, that they are irreversible once written into the blockchain. It points to the high costs of achieving such finality via ‘proof-of-work’ and to a crucial externality in the transaction market, and argues that with the current technology, the liquidity of cryptocurrencies is set to shrink dramatically in the years to come.

Much of the allure surrounding Bitcoin and related cryptocurrencies stems from the facts that no government is needed to issue them, and they can be held and traded without a bank account. Instead, they are exchanged via simple technical protocols for communication between participants, as well as a publicly shared ledger of transactions (a blockchain) that is updated by a decentralised network of ‘miners’ via costly computations (i.e. ‘proof-of-work’) (see Figure 1).

What is the economic potential of this new means of exchange? In this column, I analyse the underlying economics of how Bitcoin achieves payment finality – i.e. how it seeks to make a payment unalterable once included in the blockchain, so that it can be considered as irrevocable. I then discuss the future of this type of cryptocurrency in general.1

The key innovation of Nakamoto (2008) is to balance the cost and reward for updating the blockchain by creating incentives to ensure that updates are correct. The updating process deters forgeries by imposing a cost on updating the blockchain. At the same time, accurate updating of the blockchain confers a reward on the so-called miners who do the updating. Miners, or their computers, effectively compete to solve a mathematical problem. Presenting a solution proves that they have done a certain amount of computational work. Such ‘proof-of-work’ allows a miner to add a block of newly processed transactions to the blockchain, collecting fees from the subject transactions as well as ‘block rewards’ – newly minted bitcoins that increase the outstanding supply.

Notes: The publicly available ledger is updated in bunches of transactions, and each update is termed a ‘block’. Blocks, in turn, are chained to each other sequentially, thus forming a ‘blockchain’. The blockchain is updated much like adding individual pages with new transactions to a ledger, with page numbers determining the order of the individual pages. Each block is a small file that includes a number of payment transactions, stating the amount, the payer and the payee, and also the transaction fee. The original Bitcoin protocol restricts each block to a maximum file size of 1 MB, which in practice implies that around 2,000 transactions can be included in each block. Only transactions including the valid digital signature associated with the transferred funds are accepted into a block. A new block is added to the blockchain only about once every ten minutes. Adding a block to the existing block chain requires a valid proof-of-work (also called a ‘nonce’), which involves a hash function that takes a random text input and produces from this an output according to set rules. The key property of the SHA256 hash function used in the Bitcoin protocol is that the output is unpredictable – to get a desired result, the only solution is thus to try many starting values randomly, which creates a computing cost. Cryptographic chaining of blocks is achieved by including summary information from the previous block in the proof-of-work of the current block.

Source: Auer (2019).

The costs and rewards of Nakamoto’s updating process are the focus of my discussion (see also Auer 2019). Two questions are raised. First, how efficient is the fundamental architecture of deterring forgeries via costly proof-of-work? And second, can the market for transactions actually generate rewards that are valuable enough to ensure that payment finality is really achieved?

Analysing these two elements uncovers fundamental economic limitations that cloud the future of cryptocurrencies based on proof-of-work. In sum, with the current technology, it is not even clear whether such cryptocurrencies can keep functioning as they do at the time of writing. This statement is unrelated to well-known restrictions on the scale of such payment systems or the volatility of cryptocurrencies.2 Rather, it concerns the fundamentals of Nakamoto’s updating process, which has two limitations that interact in a fateful manner.

The first limitation is that proof-of-work axiomatically requires high transaction costs to ensure payment finality. Counterfeiters can attack bitcoin via a ‘double-spending’ strategy: spending in one block and later undoing this by releasing a forged blockchain in which the transactions are erased. I analyse the concept of ‘economic payment finality’ in a blockchain. That is, a payment can be considered final only once it is unprofitable for any potential adversary to undo it with a double-spending attack.3 If the incentives of potential attackers are analysed, it is clear that the cost of economic payment finality is extreme (see also Budish 2018 on this issue). For example, for finality within six blocks (roughly one hour), back of the envelope calculations suggest that mining income must amount to 8.3% of the transaction volume – a multiple of transaction fees in today’s mainstream payment services.

The underlying intuition is simple: double-spending is very profitable. In fact, attackers stand to gain a much higher bitcoin income than does an honest miner. While honest miners simply collect block rewards and transaction fees, counterfeiters collect not only any block rewards and transaction fees in the forged chain, but also the amount that was double-spent (i.e. the value of the voided transactions). This ‘attacker advantage’ ultimately translates into a very high required ratio for miners’ income as compared with the transaction volume (the amount that can be double-spent).

The second fundamental economic limitation is that the system cannot generate transaction fees in line with the goal of guaranteeing payment security. Either the system works below capacity and users’ incentives to set transaction fees are very low, or the system becomes congested.4Underlying this is a key externality: the proof-of-work, and hence the level of security, is determined at the level of the block one’s transaction is included in, with protection also being provided by the proofs-of-work for subsequent blocks. In contrast, the fee is set by each user privately, hence creating a classical free-rider problem, amounting to a veritable ‘tragedy of the common chain’. While each user would benefit from high transaction fee income for the miner, the incentives to contribute with one’s own fee are low.

My key takeaway concerns the interaction of these two limitations: proof-of-work can only achieve payment security if mining income is high, but the transaction market does not generate an adequate level of income.5 As a result, liquidity is set to deteriorate substantially in years to come.

The backdrop is that the bulk of miners’ current income consists of block rewards (Figure 2, left-hand side). But block rewards are being phased out (e.g in Bitcoin and many of the clones that have ‘forked’ from it, the next time block rewards will halve is in 2020). Whenever block rewards decrease, the security of payments decreases and transaction fees become more important to guarantee the finality of payments. However, the economic design of the transaction market fails to generate high enough fees. A simple model suggests that ultimately, it could take nearly a year, or 50,000 blocks, before a payment could be considered ‘final’ (Figure 2, right-hand side).

Given these considerations, I conclude with a discussion of how technological progress is set to affect the efficiency of Bitcoin and related cryptocurrencies. So-called second-layer solutions such as the Lightning Network that mount further layers of exchange on the blockchain can improve the economics of payment security. However, while they are seeing some adoption (Figure 3, left-hand side), they are no magic bullets, as they face their own scaling issues.

Figure 2 Block rewards have made up the bulk of mining income

Notes: All bitcoins in existence have been issued via ‘block rewards’. Every new block added to the block chain increases the total supply, with the newly created bitcoins being credited to the miner who adds the block. Block rewards were set to 50 bitcoins per block initially and are halving every 210,000 blocks (see left-hand panel), a formula ensuring that the total supply of bitcoins will be 21,000,000. Miners’ income is made up of block rewards and transaction fees (also see left-hand panel). The lines displayed in the right-hand panel show the implied waiting time (number of block confirmations before merchants can safely assume that a payment is irreversible) required to make an economic attack unprofitable: the attacker rents mining equipment on a short-term basis and executes a change-of-history attack. Calculations of the implied waiting times are based on equation (7) in Auer (2019) and assume transaction fees of 0.18 bitcoin per block, which corresponds to average transaction fees during the period 30 Apr 2018–31 Oct 2018. Dashed pattern indicates predicted values.

Source: Auer (2019).

Figure 3 Looking ahead: Can new technologies counter the deterioration of Bitcoin liquidity?

Notes: The left-hand panel shows the volume of bitcoins that have been committed to the Lightning Network (mainnet) as well as the number of active nodes. The right-hand panel shows the impact on the required waiting times (number of block confirmations before merchants can safely assume that a payment is irreversible) in the case that social coordination is used to undo a double-spending attack. Calculations are based on equation (7) in Auer (2019), assuming that block rewards are zero. The horizontal axis denotes the probability that the network of bitcoin users will coordinate and undo any double-spending attack. The vertical axis shows the resultant required waiting times for various levels of transaction fees.

Source: Auer (2019).

In order to prevent liquidity from ebbing away, Bitcoin and other cryptocurrencies would need to depart from using proof-of-work – a system that is not sustainable without block rewards – and embrace other methods for achieving consensus on blockchain updates. Among many proposed developments, the most prominent is ‘proof-of-stake’ – a system in which coordination on blockchain updates is enforced by ensuring that transaction verifiers pledge their coin holdings as guarantees that their payment confirmations are accurate. Yet, because such a system lacks the solid grounding offered by proof-of-work (which proves actual offline activity), its success may rest on additional overarching coordination mechanisms (i.e. some degree of implicit or explicit coordination by an institution).

Judging based on the current technology, the overall conclusion is that in the digital age too, good money is likely to remain a social rather than a purely technological construct (e.g. Carstens 2018, Borio 2018). That cryptocurrencies might in future profit from social coordination or institutions is also highlighted by the very same algebra that shows the doomsday economics of pure proof-of-work. The point is that their payment efficiency could be greatly improved by introducing an institutional underpinning to undo double-spending attacks should they occur (see Figure 3, right-hand side). In this light, one key question for future research is whether and how technology-supported distributed exchange could complement the existing monetary and financial infrastructure.

Over the past few years, awareness of blockchain technology has grown exponentially. Major institutions and key figures in business and politics are now aware of the technologies potential to decentralize our global financial and economic systems.

Following Protocol

The long-term goal of cryptocurrencies and blockchain technology has been to achieve the coveted status of mainstream adoption. However in order to do this, the technology first needs to achieve the required scalability through consensus protocols.

A consensus protocol is the backbone of every blockchain; it is a set of codified rules that dictate how a distributed network of nodes arrive at an agreement on the validity of transactions made by participants.

Decentralized networks inherently operate without leaders. Therefore, it is vital that decisions can be made quickly and efficiently without any central authority controlling the network. The method in which this should be done has been an intense subject of debate ever since Bitcoin was invented by Satoshi Nakamoto in 2009.

Ten years later, developer communities all over the world have designed a handful of consensus protocols aimed at accomplishing speed, security and decentralization on the blockchain.

In this piece, we identify and analyze the 2 most popular protocols in this article, Proof of work and proof of stake. :

Proof of Work (PoW)

The original consensus protocol designed by Satoshi himself as a way to secure the Bitcoin blockchain; proof of work requires miners to validate transactions by solving a series of complex computation problems through the use of a powerful computer or mining rig.

Miners compete to validate these transactions, and the first to solve the computation problem wins a prize in the form of whatever cryptocurrency is native to that blockchain, which is also known as a ‘block reward’.

Once several calculations are successfully performed for various transactions, the verified transactions are bundled together and stored on a new ‘block’ on the blockchain. As more coins are mined, the complexity of the computational problems increases, making it more difficult for miners to win rewards.

Pros

Proof of work is actually considered by many to be the most secure consensus protocol. In order to hack a POW system and manipulate a transaction, the attacker would need to acquire at least 51% of the computational power of the network. The cost of acquiring the hardware units needed to achieve this has been calculated to be over $1billion.

Even with all the Bitcoin competitors that have showed up in the past decade and promised better scalability and privacy, Bitcoin is still king when it comes to byzantine fault tolerant security, which is primarily due to how Bitcoin nodes arrive at consensus under a PoW system.

Cons

The problem with proof of work is three-fold: energy consumption, lack of scalability and mining centralization.

1) Energy consumption

Running the nodes that validate transactions is a massive energy consuming process. In fact, it is estimated that the Bitcoin network uses 0.22% of the global energy consumption and more power than several developing nations.

Furthermore, Miners take on the initial hardware and electricity costs when setting up these computer or mining rigs, and must offset these costs by earning cryptocurrencies when they are the first to successfully validate a transaction.

2) Lack of scalability

As a result of the massive hardware requirement, PoW systems don’t scale very well. Currently, Bitcoins only option for scaling is to develop ‘layer 2’ solutions like ‘Lightning network’, which only extend the capacity of existing blockchains so that transactions can be cheaper and more frequent.

3) Mining Centralization

Becoming the first to validate a transaction earns you a prize of 12.5 Bitcoin (or about $48k in todays price). This prize creates an incentive for miners to accumulate the most hardware in order to operate nodes with the hashing power to solve computation problems faster.

What ends up happening as a result of this incentive model is that certain participants accumulate far more hardware than others and end up monopolizing the mining process, leading to centralization.

This is demonstrated by the fact that Antpool and BTC.com (2 mining pools owned by the company Bitmain) account for about 30% of all the processing power on the global Bitcoin network.

Proof of Stake (PoS)

In a PoS consensus protocol, users ‘stake’ a certain amount of tokens as collateral in exchange for the ability to validate transactions in a new block of the blockchain. This insures that validators are incentivized to act honestly; otherwise they risk losing their entire stake if they attempt to manipulate the transaction process in any way.

Unlike PoW, the only requirement for participating in a PoS protocol is that you show ownership of a certain number of cryptocurrency units belonging to that blockchain. Blocks in a PoS system are ‘forged’ or ‘minted’, not mined.

Pros

PoS does not require any physical hardware to validate transactions and therefore consumes much less energy than PoW and is more environmentally friendly.

A greater number of people are encouraged to run nodes and get involved because it is easy and affordable to participate in this system; this results in more decentralization.

PoS eliminates the possibility of a 51% attack, since there is no computing power to overtake.

Cons

PoS systems can lead to participants who hold the most coins having a larger impact on changes made to the network. Since major changes are based on voting consensus and those who hold the most coins have the most voting power, PoS Blockchains can easily become centralized.

This centralization can lead to security issues, as large coin stakeholders can consolidate power in an attempt to conspire against other large coin stakeholders to overtake the network.

Delegated Proof of Stake (DPoS)

Delegated proof of stake adopts a democratic electoral system on top of the traditional proof of stake protocol.

With DPoS, the network votes in multiple “witness nodes” as representatives who help make certain high-level decisions more quickly without polling the entire network. Network participants use their voting power (which is based on the number of tokens they hold) to influence the voting decision for new witness nodes.

As quickly as witness nodes can be voted in, they can also be voted out by not performing their duties to secure the network.

Pros

The primary advantage of DPoS is speed. By nominating just 100 witness nodes, the DPoS has been proven to provide Blockchains like EOS with 50,000 transactions per second in Testnet.

Cons

In the past year, EOS has become the poster child for all things positive and negative about delegated proof of stake.

Last year, 27 block producers (or ‘witness nodes’) who are in charge of validating transactions and were voted into their position of authority were directed to end all transactions with immediate effect in an effort to stop several thefts. Although understandable considering the circumstances, many viewed this intervention as authoritarian, calling into question whether the whole DPoS system is really just another centralized power structure in disguise.

Consensus

Overall, the debate about which consensus protocol is better seems to come down to how well the blockchain is able to balance faster transaction speeds with strong security, privacy and censorship resistance.

This challenge has been coined the ‘scalability trilemma’ by Ethereum Founder Vitalik Buterin, and it addresses the problem of how to develop a blockchain technology that offers scalability, decentralization and security, without compromising either one.

Although neither proof of work or proof of stake completely solve this problem, the more incremental progress we can make towards achieving harmony between the 3 components, the closer blockchain technology can finally move towards achieving mainstream adoption.